Federal Reserve Chairman Jerome Powell was urged to step in and cut interest rates as early as this week to soothe investor fears of a possible recession following last week’s disappointing jobs report and the massive stock market selloff on Monday.
The Dow Jones Industrial Average and the Nasdaq were both down more than 1,000 points to start Monday’s trading session on Wall Street.
The US markets were reacting to the bloodbath in Japan, where the Nikkei fell by more than 12% – its worst one-day performance since the “Black Monday” crash of 1987.
Jeremy Siegel, professor emeritus of finance at the prestigious Wharton School of the University of Pennsylvania, called on the Fed to make an emergency 75 basis-points cut — or 0.75%.
Siegel also said there should be “another 75 basis-point cut indicated for next month at the September meeting — and that’s minimum.”
“The fed funds rate right now should be somewhere between 3.5% and 4%,” he told CNBC on Monday.
Last week, the Fed ended its two-day meeting by keeping interest rates at 5.25% to 5.5%.
There is precedent for the Fed instituting emergency rate cuts. In 2001, then-Fed Chair Alan Greenspan made an emergency 50 basis-point cut after declining to cut rates at the central bank’s December 2000 meeting.
Siegel pointed to the weak jobs report from last week as well as increasing unemployment. He said that the Fed hasn’t moved quick enough on slashing interest rates despite the fact that inflation has cooled from its peak in the summer of 2022.
“How much have we moved the fed funds rate? Zero,” he said. “That makes absolutely no sense whatsoever.”
Siegel predicted that the markets will react badly if the Fed doesn’t cut interest rates before its September meeting.
“If they are going to be as slow on the way down as they were on the way up, which by the way was the first policy error in 50 years, then we’re not in for a good time with this economy,” Siegel said, adding: “Don’t think that the Fed knows something. … Since when has the Fed known anything about the economy?”
“The market knows so much better than the Fed. They’ve got to respond.”
Other analysts, however, weren’t so sure that the Fed needed to step in.
“The Fed could ride in on a white horse to save the day with a big rate cut, but the case for an inter-meeting cut seems flimsy,” said Brian Jacobsen, chief economist at Annex Wealth Management.
“Those are usually reserved for emergencies, like COVID, and an unemployment rate of 4.3% doesn’t really seem like an emergency.”
“The Fed could respond by stopping” the shrinking of its holdings of Treasurys and other bonds, which could put less upward pressure on longer-term yields, he said.
“That could at least by a symbolic action that they’re not blind to what’s going on.”
John Lynch, chief investment officer for Comerica Wealth Management in Charlotte, noted that “there is growing sentiment…the Fed has waited too long to cut interest rates and is now behind the curve.”
“While we’re not completely sold on the new narrative, the one thing that seems certain is that there is more volatility ahead,” Lynch said.
Another analyst, Jamie Cox, thinks the stock market selloff is much ado about nothing.
“Sell-offs that manifest themselves through wild swings in the currency markets are sharp and swift, but usually very short lived,” said Cox, managing partner for Richmond, Va.-based Harris Financial Group.
“Some say this is overdue, I say use this downturn to pick up some deals.”
Goldman Sachs economist David Mericle sees a higher chance of a recession following Friday’s jobs report. But he still sees only a 25% chance of that, up from 10%, in part “because the data look fine overall” and he does not “see major financial imbalances.”
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